Options Roll Up

What Is an Options Roll Up?

An options roll up alludes to closing an existing options position while opening another position in a similar option at a higher strike price.

It is something contrary to an options roll down, where an investor simultaneously closes one position and opens one more with a lower strike price.

Understanding an Options Roll Up

An options roll up, which is short for "roll an option up to a higher strike price," alludes to expanding the strike price of an option position by closing out the initial contract and opening another contract for the equivalent underlying asset at a higher strike price. The trader executes the two legs simultaneously to reduce slippage or profit erosion, due to a change in the price of the underlying asset that could happen while putting on the strategy.

Whether the existing position is a put or a call, the strategy for rolling up is something similar. A roll up on a call option is a bullish strategy since you are betting that the price will keep on ascending to the new, higher strike. It is likewise a bullish trade while rolling up put options, since moving to a higher strike shows you don't completely accept that the price will drop lower.

While rolling up a call option, the trader ought to guarantee that the net cost of the new position is lower than the profit produced from closing the old position, given that the higher strike, out-of-the-money (OTM) call premium ought to be less. On the other hand, new put contracts would likewise cost more in a roll up than that of the old put contracts.

Contingent upon whether the old and new positions are long or short, the consequence of a roll up could be a debit or a credit to the account. How much relies upon the price differential of the rolled options.

How an Options Roll Up Works

To start an options roll up, the trader can either set up simultaneous "sell to close" and "buy to open" orders to exit an existing long position while opening another long position at a higher strike, or set up simultaneous 'buy to close" and "sell to open" orders to exit an existing short position while opening another short position at a higher strike.

There are several justifications for why a trader would roll up a position, including to keep away from exercise on short call positions or to just increase bullishness for a long call position. Recall that a in-the-money (ITM) long call loses a large portion of its time value, so rolling to an OTM call would give the trader partial profits and, conceivably, more bang for the buck, because of the lower price of the new calls.

A long put position could roll to a higher strike on the off chance that the underlying asset moved higher in price however the trader actually accepts it will ultimately fall. Along these lines, the position stays in place with losses cut fairly.

Traders ought to note that the spreads between the prices of options with various strikes differ. Some market conditions won't be as favorable for rolling up as others.

Different Types of Options Rolls

Options traders utilize different rolling strategies to answer changing market conditions, secure profits, limit losses and manage risk.

Traders can likewise roll down a position similarly as they can roll up. This strategy essentially includes closing the original position and opening another position with a similar underlying asset and expiration date, yet at a lower price.

Likewise, traders can roll forward a position by keeping the strike price something similar while reaching out to a longer expiration date. On the off chance that the new contract includes a higher strike price and a later expiration date, the strategy is called a "roll-up and forward." Conversely, assuming the new contract is unified with a lower strike price and later expiration date, it is called a "roll-down and forward."

Features

• An options roll up strategy is typically sent in response to changing market conditions.
• An options roll up closes out an options position in one strike to open another position in a similar type of option at a higher strike price.
• A roll up on a call option or a put option is a bullish strategy, while a roll down on a call or put option is a bearish strategy.